Question

Aeryn Soon is a potential investor of Hippy Dippy Inc.’s preferred stock, which is currently selling for $475 per share. Hippy Dippy pays an annual dividend of $40, and Aeryn’s required return is 8 percent. Should she purchase this preferred stock or NOT? Why?

Answer 1

Answer:

Yes she should purchase this preferred stock.

Explanation:

Return on investment as a percentage = return/capital invested * 100

For Aeryn to decide whether she should purchase this preferred stock, its return on investment should be higher than or equal to 8%. The return on investment of this preferred stock is $40/$475 * 100 = 8.42%, which is higher than her required return therefore she should purchase the preferred stock.